Weak Standards Make Annuities Prohibited Transactions in ERISA Plans

September 15, 2025November 2, 2025 / ChrisTobe / 2 Comments

Introduction

ERISA was enacted to impose strict fiduciary, accounting, and investment performance standards on retirement plan assets. SEC-registered mutual funds must meet these standards through transparent reporting, daily pricing, and oversight by independent boards. By contrast, insurance-based annuities operate under weaker fiduciary standards, opaque accounting rules, and undisclosed performance spreads, making them unlikely to qualify for an exemption from ERISA’s prohibited transaction rules.¹

As my earlier analyses demonstrate, annuities have become a gateway drug that opened the door to non-standard accounting and conflicted arrangements in retirement plans.²

I. Fiduciary Standards: ERISA §404(a) vs. NAIC Rule 275

ERISA §404(a) imposes explicit duties of prudence and loyalty, requiring fiduciaries to act solely in the interest of participants and beneficiaries. By contrast, NAIC Rule 275, the state insurance ‘best interest’ standard, does not include a loyalty duty and permits conflicts of interest if disclosures are made.³ Plan fiduciaries cannot rely on NAIC compliance to meet ERISA duties. A product that satisfies Rule 275 may still violate ERISA’s exclusive benefit rule, making it a prohibited transaction.

II. Accounting Standards: Book Value vs. Market Value

Mutual funds must report daily mark-to-market NAVs under SEC rules, fully reflecting gains and losses. Annuities, especially General Account or Separate Account contracts, are governed by statutory accounting. Assets are often held at amortized cost, meaning losses are hidden unless realized. Portfolios frequently contain 30–50% private credit and alternatives.⁴ Book-value accounting disguises true risk, making annuities appear ‘safe’ when underlying portfolios may be volatile or impaired.

III. Investment Performance Standards: Spreads and Opaqueness

Mutual funds disclose expense ratios, portfolio holdings, and benchmark comparisons. Annuities credit 2–3% to participants while earning 6–7% on general account assets. The undisclosed spread—sometimes over 400 basis points—represents pure insurer profit.⁵ This opacity prevents fiduciaries from assessing the reasonableness of compensation, triggering ERISA §406(b) self-dealing prohibitions.

IV. Conflicted Providers and “Party in Interest” Risks

In many 401(k) plans, the recordkeeper is also the annuity provider. As Cunningham v. Cornell highlighted, this dual role creates inherent conflicts of interest. When insurers steer plan assets into affiliated annuities, fiduciaries face direct exposure under the prohibited transaction rules.⁶

V. Transparency Suppression: Prudential and NAIC RBC Proposal

Prudential, domiciled in New Jersey, shields its quarterly solvency filings under N.J. Stat. §17-23-1, denying plan fiduciaries access to critical risk data.⁷ The NAIC Capital Adequacy Task Force has proposed banning public disclosure of insurer Risk-Based Capital (RBC) scores, even though the Society of Actuaries warns that transparency is essential.⁸ Fiduciaries cannot evaluate insurer solvency without this data, a critical factor in selecting annuities.

VI. Litigation Outlook

The Supreme Court has already narrowed available exemptions from prohibited transaction rules.² Combined with weak fiduciary standards, opaque accounting, undisclosed spreads, and active suppression of solvency data, annuities present a litigation time bomb: plaintiffs will argue that fiduciaries cannot prudently select annuities without access to solvency and fee data. Courts will increasingly view annuities as per se prohibited transactions absent full transparency. Most annuities do not have downgrade provisions, so their liquidity risks go up simultaneously with their credit risk. Fabozzi, in the 1998 Handbook of stable value, says that General Account fixed annuities have 10 times the risk of synthetic diversified stable value.

Conclusion

Annuities fail across three pillars: fiduciary duties, accounting standards, and performance transparency. SEC-registered mutual funds meet all three; annuities meet none. By continuing to rely on these weaker standards, insurers are ensuring that their products will be viewed as prohibited transactions under ERISA, and plan fiduciaries who adopt them will face heightened litigation risk.

Footnotes

¹ ERISA §406; see also https://commonsense401kproject.com/2025/06/13/annuities-are-prohibited-transactions-via-chat-gpt/
² https://commonsense401kproject.com/2025/05/10/annuities-flunk-prohibited-transactions-exemption-scotus-ruling-will-open-floodgates-of-litigation/
³ Comparison of ERISA §404(a) with NAIC Rule 275; see also https://commonsense401kproject.com/2025/07/27/diversification-abandoned-why-plan-fiduciaries-must-rethink-fixed-annuities-and-pension-risk-transfers/
⁴ https://commonsense401kproject.com/2025/08/12/4-sets-of-books-how-trumps-401k-push-opens-the-door-to-accounting-chaos/
⁵ Spread profits analysis; see https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/
⁶ Cunningham v. Cornell Univ., 86 F.4th 961 (2d Cir. 2023).
⁷ N.J. Stat. §17-23-1.
⁸ NAIC, Capital Adequacy Task Force, Special National Meeting Packet (2025), p.56.

SOURCES

The Handbook of Stable Value Investments 1st Edition by Frank J. Fabozzi 1998 Jacquelin Griffin Evaluating Wrap Provider Credit Risk in Synthetic GICs pg. 272 https://www.amazon.com/Handbook-Stable-Value-Investments/dp/1883249422

National Association of Government Defined Contribution Administrators. 2010. 2010 Issue Brochure – What Plan Sponsors Should Know About Stable Value Funds (SVF) www.nagdca.org/documents/StableValueFunds.pdf

Shames, Mitch. 2022. “Annuities: The straw that breaks the back of retirement plan fiduciaries,” Benefits Pro. May 3, 2022. https://www.benefitspro.com/2022/05/03/annuities-the-straw-that-breaks-the-back-of-retirement-plan-fiduciaries/?slreturn=20240312164319 . Accessed on March 12, 2024.

Tobe, Christopher B. 2004. “The Consultants Guide to Stable Value.” Journal of Investment Consulting, 7(1), Summer 2004, Available at SSRN: https://ssrn.com/abstract=577603 . Accessed on March 12, 2024.

Federal Reserve Bank of Minneapolis Summer 1992 Todd, Wallace SPDA’s and GIC’s http://www.minneapolisfed.org/research/QR/QR1631.pdf

“Safe” Annuity Retirement Products and a Possible US Retirement Crisis Journal of Economic Issues Accepted 2024 Dr. Tom Lambert and Chris Tobe https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4761980

Testimony by Ben S Bernanke, Federal Reserve, US House of Representatives, Washington DC, 24 March 2009 https://www.bis.org/review/r090325a.pdf

Keep Private Equity out of 401(k) Target Date Funds

September 4, 2025November 2, 2025 / ChrisTobe / Leave a comment

Over half of all 401(k) assets are invested in Target Date Funds (TDFs), the default investment for most workers. Proposals to embed 15% allocations to private equity (PE) in these TDFs raise severe fiduciary, legal, and policy concerns.

Private equity’s opaque self-valuations, smoothed returns, and layered fees (≈600 bps) make it wholly unsuitable for retirement savers—particularly in default funds where workers have no choice. This is not innovation; it is regulatory arbitrage designed to funnel billions in hidden fees out of participant accounts.

Key Findings

1. Fees 100x higher than index funds.

PE all-in costs: ~6.0% annually (Phalippou 2020).
Index funds: 0.03%–0.05%.
A 15% sleeve adds 0.90% annual drag to the entire TDF—cutting lifetime wealth by 20–25%.

2. Fraudulent return smoothing.

PE funds self-price and delay write-downs.
Reported volatility and correlations are artificially low.
Asset allocation models therefore over-allocate to PE, embedding mispriced risk in retirement glidepaths.

3. Liquidity mismatch.

TDFs promise daily liquidity.
PE funds lock up capital for 10+ years.
Participants could face redemption delays, gates, or markdowns inconsistent with plan representations.

4. Weakest regulator wins.

SEC and OCC rules demand transparency and independent valuation.
Sponsors are instead turning to state-chartered CITs, where oversight is minimal and disclosure optional.
This is textbook regulatory arbitrage.

5. Fiduciary red flags.

ERISA requires prudence and reasonable fees.
Supreme Court precedent (Tibble; Hughes) obligates ongoing monitoring and removal of high-cost options.
Embedding PE in QDIAs (defaults) is especially egregious because workers never affirmatively opt in.

Policy Recommendations

DOL & SEC Joint Guidance: Prohibit private equity allocations in QDIAs until independent valuation and full fee disclosure are mandatory.
State CIT Oversight: Close the loophole by requiring federal standards (SEC/OCC level) for any retirement-plan CIT.
Fee Disclosure Reform: Mandate reporting of all fees, including portfolio company monitoring and transaction charges.
Participant Protections: Require opt-in consent, with plain-English disclosures, before allocating participant funds to PE.

Conclusion

Private equity in 401(k) Target Date Funds is not diversification—it is defaulting American workers into opaque, fee-rich products they cannot understand or escape. This violates fiduciary duty under ERISA and undermines retirement security. Regulators and policymakers should act now to prevent a massive transfer of wealth from retirement savers to private equity sponsors.

4 Sets of Books: How Trump’s 401(k) Push Opens the Door to Accounting Chaos

August 12, 2025November 2, 2025 / ChrisTobe / Leave a comment

For decades, 401(k) investment accounting lived in a relatively clean world. Most plans are used primarily:

One set of books – a portfolio of SEC-registered mutual funds, all marked to market daily; or, around 25% used mark to market for 90% of their options, with perhaps one or 2 stable value options using book value accounting a second set of books.

Now, under Trump’s crypto and private equity in 401(k) push, we are rapidly heading toward four incompatible accounting systems inside the same retirement plan. One accounting standard is essential for transparency and accountability—but the direction we’re heading guarantees neither.

1. Mutual Funds: The Gold Standard of Market Value Accounting

Accounting Standard:

GAAP / FASB rules for investment companies, enforced by the SEC.
Mark-to-market daily pricing based on observable market prices.
Independent custodians and pricing vendors.
Audited annual reports with standardized disclosures.

Why It Works:

Participants see a daily NAV (Net Asset Value).
Prices are transparent, comparable, and difficult to manipulate.
Fiduciaries can benchmark performance accurately.

This is the historic standard that most investors think applies to their 401(k) across the board. Unfortunately, it’s only true for the mutual fund portion of a plan.

2. Annuities: Book Value Accounting in the Shadows

Accounting Standard:

Statutory accounting under the NAIC Accounting Practices and Procedures Manual.
Regulated by a single “cherry-picked” state insurance commissioner—chosen by the insurer, not the plan sponsor.
Assets are held at amortized cost or “book value,” not market value.

Key Differences from Mutual Funds:

Gains/losses on investments are not reflected daily—only when sold or impaired.
Investment returns to participants are set by the insurer’s discretion, often far below what the general account earns.
Spread profits (difference between what the insurer earns and what it credits) are not disclosed in plan reports or participant statements.

Fiduciary Implications:

Because statutory accounting hides market swings, risk appears lower than it is.

The DOL has largely ignored this space, and litigation has been sparse, focusing mostly on small plans where it’s too costly to sue. I believe that annuities are prohibited transactions https://commonsense401kproject.com/2025/06/13/annuities-are-prohibited-transactions-via-chat-gpt/ but I think litigation could be increasing. https://commonsense401kproject.com/2025/05/10/annuities-flunk-prohibited-transactions-exemption-scotus-ruling-will-open-floodgates-of-litigation/

As I’ve argued before, annuities were the gateway drug that allowed non-standard accounting to creep into 401(k)s【https://commonsense401kproject.com/2025/08/07/trumps-crypto-and-private-equity-in-401k-push-enabled-by-the-gateway-drug-annuities/

3. Private Equity & Alternatives: Mark-to-Make-Believe

Accounting Standard:

ASC 820 (Fair Value Measurement) applies, but with a catch—private assets are often valued using Level 3 inputs (unobservable data).
Valuations are performed by the managers themselves or by “independent” appraisers hand-picked by the managers.

Why It’s Problematic:

There is no daily pricing—valuations are often quarterly, lagged, and subjective.
Conflicts of interest are rampant; managers have incentives to overstate values to boost reported returns or maintain fee levels.
Cash flows, capital calls, and distributions make performance comparisons difficult.

I’ve called this mark to make believe because, unlike mutual funds, these valuations can be engineered to smooth returns and hide losses until a crisis forces a markdown.

ERISA Status:

I believe private equity in 401(k) plans is a prohibited transaction https://commonsense401kproject.com/2025/07/02/private-equity-is-a-prohibited-transaction-via-chat-gpt/

Hiding Private Equity in 401(k) Target Date Funds risks the entire TDF as a Prohibited Transaction- ChatGPT

4. Crypto: The Accounting Wild West

Accounting Standard:

None has fully settled on retirement plans.
Under GAAP, crypto is treated as an indefinite-lived intangible asset—which means it is written down for impairment but never marked up until sold.
Pricing comes from exchanges with varying reliability and susceptibility to manipulation.

Risk Profile:

Valuation swings of 50%+ in a year.
Custody and security risks beyond normal market investments.
Potential for outright fabricated valuations if held in poorly regulated vehicles.

I have argued that crypto is a prohibited transaction under ERISA https://commonsense401kproject.com/2025/07/03/crypto-is-erisa-prohibited-transaction-chatgpt-do-not-use-in-401k/

but the bigger danger is that, without strong accounting rules, you may never know what your crypto holdings are really worth.

Comparison Table: The Four Sets of Books in 401(k) Plans

Investment Type	Accounting Basis	Valuation Frequency	Regulator	Transparency Level	Fiduciary Risks
Mutual Funds	Market value (GAAP/FASB, SEC rules)	Daily	SEC	High – daily NAVs, audited	Low, unless fees are excessive
Annuities	Book value (NAIC statutory accounting)	Infrequent, market values not shown	State insurance commissioner (insurer-chosen)	Low – returns set by insurer, spread hidden	High – opaque returns, single-entity credit risk
Private Equity / Alternatives	“Fair value” with Level 3 inputs (ASC 820)	Quarterly or longer, lagged	SEC for registered funds; otherwise state banking/trust regulators for CITs	Low to moderate – manager-controlled valuations	High – valuation bias, illiquidity, conflicts
Crypto	Intangible asset model under GAAP	Continuous in theory, but source-dependent	SEC/CFTC (fragmented oversight)	Very low – price feeds vary, no unified custody standard	Very high – volatility, custody risk, fraud potential

The Bigger Danger: Mixing the Books in Target Date Funds

The most alarming development is blended accounting inside target date funds, especially those structured as state-regulated CITs instead of SEC-regulated mutual funds.

Why this matters:

A single target date fund could hold mutual funds (market value accounting), annuities (book value accounting), private equity (manager valuations), and even crypto—all in one NAV.
The net asset value the participant sees will be a cocktail of different accounting standards, some transparent, some opaque.
You could be looking at a “smooth” performance line without realizing risk is hidden under the hood.

How It Will Happen:

Poorly regulated CITs allow private equity or annuities to be layered inside other CITs.
I predict a 10%–15% private equity allocation will be buried inside a CIT that’s then wrapped into a target date fund.
Advisors will tell fiduciaries that a “trusted professional manager” can handle these complex allocations—removing the incentive to dig deeper.

Pru and Principal are already structuring toxic target dates like this https://commonsense401kproject.com/2022/06/07/toxic-target-date-case-study-of-the-worst-of-the-worst/

ERISA’s Prohibited Transactions: The Untapped Defense

ERISA’s prohibited transaction rules were designed to stop creative accounting and self-dealing before they harm participants. But:

The DOL has not enforced these rules aggressively in the annuity or CIT context.
Litigation is only starting to touch on these accounting mismatches.

I believe annuities, private equity, and crypto in 401(k) plans are all prohibited transactions unless they fall under narrow exemptions—which most don’t in practice.

Conclusion

We are moving from one uniform, transparent accounting system to four incompatible ones inside the same retirement plan. This is not just an accounting curiosity—it is a structural shift that enables opacity, hides risk, and erodes fiduciary accountability.

Mutual funds gave us a clean, daily-marked-to-market view of investments. Annuities broke that standard, private equity exploited it, and crypto may blow it wide open. Without one standard of accounting, ERISA fiduciaries will be flying blind—and so will participants.

With Annuity Rates in 401(k) Plans: You Get What You Negotiate

July 28, 2025July 29, 2025 / ChrisTobe / Leave a comment

Welcome Back to the Dealership—Without the Internet

There was a time not too long ago when buying a car meant walking into a dealership and bracing for a battle. You knew better than to pay the sticker price. There was no CarFax, no Kelly Blue Book at your fingertips—only your grit and your negotiating skills stood between you and a bad deal. Fast forward to today, and while consumers have gained power in most financial transactions thanks to transparency and competition, one part of the retirement world remains stubbornly stuck in that old sales model: fixed annuities in 401(k) plans.

When it comes to these insurance-based investments, especially general account fixed annuities, the rate you receive isn’t always about the market—it’s about your leverage. Your negotiating power. And for too many plans, that means quietly accepting returns well below what other, savvier plans are earning. The result? A two-tiered system where uninformed or unempowered fiduciaries leave millions on the table while others cash in.

Sticker-Price Rates for the Uninitiated

Let’s start with what most plan sponsors and fiduciaries are seeing: general account fixed annuity 2 to 3% rates with some less than 2%. In most cases, these rates have been locked in for years. Plan fiduciaries assume that’s the best available. They’ve never asked for better. They trust the insurance company’s glossy marketing and ratings and their consultants.

Prudential, for example, publicly posts general account rates of 3%–4% on consultant platforms like FI360/Broadridge. Some like TIAA and Mass Mutual post rates of 4%-5% for basically the same or less risky product. But the rates with many insurers like Prudential can vary from 1.5% to nearly 7%, with little rhyme or reason. In at least one case, a savvy union plan in New Jersey negotiated a general account fixed annuity rate of 6.8%—within the same 401(k) framework.

Yes, you read that right. Nearly five full percentage points higher than what other plans were receiving from the same insurer for the same product type. The only difference? They knew they could ask.

A Broken Marketplace

What we’re seeing is not an efficient marketplace. It’s a holdover from a time when product pricing was opaque and negotiation was king. But here’s the problem: this isn’t used car sales. These are retirement assets regulated by ERISA, with fiduciary standards that prohibit arbitrary pricing structures that benefit one plan over another without justification.

If an insurance company retains total discretion over annuity rates, then it also retains the ability to allocate higher yields to preferred clients—possibly to reward larger assets, political influence, or favored consultants—and lower yields to everyone else. This unequal treatment is not only unfair; it’s potentially unlawful under ERISA.

As I argued in this recent piece, annuities in 401(k) plans often constitute prohibited transactions when they are offered with non-transparent, discretionary pricing structures. If plan fiduciaries do not negotiate, they are not fulfilling their duty of loyalty or prudence under ERISA.

Consultants Are Not Always Your Friend

A deeper concern is that some consultants—the very advisors plan sponsors rely on to protect them—are complicit. Rather than push for higher negotiated rates or run competitive bids, some simply accept posted rates or worse, recommend insurers where they may have their own compensation arrangements or conflicts. Some consultants have insurance licensees where they can receive hidden insurance commissions. Sometimes rates are burned off to pay for recordkeeping fees, consultant fees etc.

Some consultants may use databases like FI360/Broadridge, which show insurer-published general account rates many conflicted consultants do not even do that. But unless they go further—soliciting competitive proposals or uncovering the higher rates being granted to others—they are not doing their job. Worse, in some cases they actively steer plans toward underperforming fixed annuities while pocketing fees from the insurers themselves.

A Fiduciary Wake-Up Call

The key message for fiduciaries of 401(k) plans is this: you get what you negotiate.

If your plan holds a general account annuity yielding 2%-4%, and you’ve never asked for more, you may be in violation of your fiduciary duty. Your peers—especially in larger or union-affiliated plans—may be earning triple your rate simply because they demanded better terms.

That’s not just a bad deal. It’s a fiduciary breach.

The Solution: Demand Transparency and Competition

Require Competitive Bids – Treat your annuity provider like any other investment manager. Get multiple quotes. Benchmark rates.
Disclose the Spread – Insist on full transparency on how the insurer earns money. What’s the gross yield on their general account? What are they keeping?
Use Independent Experts – Be cautious of consultants who may have undisclosed relationships with insurers. Get independent advice or a second opinion.
Document the Negotiation – Keep records of the steps you took to secure the best rate. It’s your defense in any potential ERISA litigation.
Over time get rid of your Conflicted Non-Transparent fixed annuities, switch to a diversified Synthetic based stable value fund like the Vanguard RST, or Fidelity MIPS, this may take time because many fixed annuities are known as “Roach Motels” you easily get in but getting out may require a substantial penalty

Conclusion

Fixed annuities in 401(k) plans should not be sold like used cars. They should reflect a competitive, prudent process.

In the end, it’s simple: when it comes to annuity rates, you get what you negotiate—or what you fail to.

The Great Annuity Mirage: How ‘Separate Accounts’ Continue to Mislead

July 28, 2025October 11, 2025 / ChrisTobe / Leave a comment

Back in the early 1990s, after the fallout from several major insurance company failures, the industry scrambled for a new story to tell. Enter the ‘separate account’ — a clever rebranding of the same old insurance guarantee wrapped in a new package. Meant to reassure jittery retirement plan sponsors, these products were marketed as safer, more transparent, and more sophisticated than their general account predecessors. By 2000, most of the larger plans had moved on to synthetic diversified stable value as a prudent fiduciary choice. However, many mid-size to smaller plans, with a few large plans, have held on to this misleading product.

A Glossy Exterior, a Hollow Core

Separate accounts claim to offer a customized portfolio insulated from the insurer’s broader financial health. But the reality is far less reassuring. Plan sponsors hold nothing more than a contractual promise. They don’t own the assets, they can’t see inside the portfolio, and they have no control over the investment strategy. The insurer remains in full command — and the assets remain on its balance sheet. There are no strict investment guidelines, so if the annuity provider is downgraded, they can shift the high-quality assets supposedly in the Separate account ie, investment grade, and replace them with illiquid private credit.

Behind the Curtain: How the Spread Game Works

Here’s the secret sauce: insurers earn a ‘spread’ — the difference between what their investments yield and what they credit to plan participants. Sometimes that spread is over 2%, and that’s just what we can see. Insurers disclose yields on a selective basis, and often only once a year, making it impossible for fiduciaries to truly assess whether the rates offered are fair or competitive. One former Transamerica manager even described a ‘true-up’ day, where the safer, prettier assets are momentarily held just long enough to create a nice snapshot for clients. The rest of the month? Back to the riskier general account.

No Transparency, No Fiduciary Duty

Separate account contracts typically avoid any fiduciary obligations. There’s no obligation to disclose holdings, no responsibility to ensure investment prudence, and no transparency into fees, risks, or performance. The entire structure functions as a black box, with the insurer firmly in control. And if the insurer fails? Plan assets tied to a separate account are not guaranteed safe harbor — they could be frozen, impaired, or even lost in a liquidation.

Why Consultants Still Fall for It

Despite the red flags, many retirement plan consultants continue recommending these products. Why? Sometimes it’s a matter of inertia — separate accounts have been around so long that they’ve become familiar. Other times, it’s conflict: insurers often reward consultants through indirect compensation or other incentives. Whatever the reason, the end result is the same: plan participants are exposed to unnecessary risk while insurers quietly profit.

Better Alternatives Already Exist

Synthetic GICs — stable value products with transparent plan-owned bond portfolios and independent wrap providers — offer a far safer, more fiduciary-friendly alternative and are used by the majority of large plans. These products separate management, ownership, and strict transparent investment guidelines and crediting rate formulas.

The Illusion Persists

It’s time to call separate accounts what they are: a mirage. They simulate transparency. They simulate safety. But at their core, they rely on the same concentration of risk, lack of disclosure, and one-sided control that make general account annuities so problematic. Fiduciaries owe their participants better.

Accounting and Q&A NOTES

There are 3 tests to show that a Separate Account is a Fake

Lack of strict investment guidelines in the contract. This allows the insurance company, when they get in a liquidity credit squeeze, to swap out the higher grade bonds in the suppossed separate reference portfolio with alternative private credit, perhaps worth 80 cents on the dollar.
Lack of a strict crediting rate formula in the contract. While they will pretend to calculate a rate off of a reference portfolio of higher quality, that is mostly a game to justify the low yield. They control all the inputs to the formula with no transparency, so they can manipulate it to anything they want
No Downgrade provision. If it were really separate, they would not mind giving out.

PWC did a good description of a Separate Account Fixed Annuity in some 401 (k) 5500 financials

The Plan is a party to a fully benefit-responsive investment contract with the John Hancock Trust
Company, LLC (“John Hancock”) for the years ended December 31, 2023, and 2022. John
Hancock maintains the contributions in a general account. The account is credited with earnings
on the underlying investments and charged for participant withdrawals and administrative
expenses. The contract earnings represent the income from specific assets owned by John
Hancock in a pooled separate account. The contract issuer is contractually obligated to repay the
principal.

Maersk does not own any assets or a portfolio, just a contract. JH bases the rate they pay in the contract on a lower-yielding subset of assets they own in a separate account portion of the general account. The general account is filled with investments ranging from 2% to 12%. They carve out in a pretend portfolio some of the lower-yielding and lower-risk and come up with a rate of 3% pay it out. So they make a general account return of 7% overall and keep a 4% spread as profit. The plan takes nearly half of the alternatives, but only gets the returns of the lowest 1/4.

There are many more examples of Separate Account examples (MassMutual Great Grey). In Chapter 32 on Separate Accounts in the book on US tax reserves for Life Insurers, Separate Account revenues are rolled up with General Account revenue on tax reporting. The DOL in 20111-07A disclosure clearly distinguishes Separate Account from Synthetic Stable Value. Blue Prairie in a 2014 study, found that the Separate Account had a 60% higher duration than synthetic, 4.42 vs. 2.53. See also the Mercer Nevada Presentation.

S&P, in general, gives the same crediting rates to General Account and Separate Account annuities from the same issuers. S&P analysts, in a chapter in the Handbook of Stable Value Investments, show that states differ so much in their credit protection for separate accounts that identical contracts could result in different ratings in different states:

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Target Date Benchmarks – ChatGPT

July 9, 2025July 9, 2025 / ChrisTobe / Leave a comment

Target-date funds are over 50% of 401(k) assets. Litigation around target date funds I think shows a lack of knowledge around investment performance. Target date funds were created to hide fees and mask performance concerns, and are impossible to benchmark. In fact, many were created to manipulate benchmarks. I feel many plaintiff attorneys are not getting the full potential out of their cases by not looking under the hood of Target Date funds to find out what is really going on.

In my testimony for the June 2009 joint SEC-DOL hearing on target date funds, I contended that it’s huge growth would further concentrate management into an oligopoly and higher fees. I also criticized the target date structure as a step backward for transparency of fees, performance, and risk. I thought it would push plans toward a one-provider, closed platform that would lead to conflicts of interest and higher fees.

Target Date Fund Asset Allocation Drives Risk and Performance

Asset allocation is the main driver of performance and risk. Because of the lack of transparency and investment policy guidelines, performance gaming of the benchmark in target date funds in invited. Target date fund specialist Ron Surz warns against target date funds holding high equity allocations for those close to retirement

Joe Nagengast of Target Date Analytics in the June 2009 joint SEC-DOL hearing on target date funds. “The way to win the short-term performance horse race for target date funds (and the resulting market share) has been, in many time periods, through higher equity allocations.”

I asked ChatGPT to elaborate on this issue and specifically benchmarking to the S&P target date fund index

—————————————————————————-

From ChatGPT. Asset allocation explains ~90% of return variability, then comparing TDFs with vastly different glide paths or allocations is not apples-to-apples.

⚖️ Why It’s a Problem

401(k) Target Date Funds often differ dramatically in:

Equity vs. bond allocations (e.g., 90/10 vs. 60/40 at the same “target date”)
Glide path design (to retirement vs. through retirement)
Exposure to alternatives, real assets, or high-yield bonds
Risk levels (volatility and drawdown potential)

So, simply comparing returns (e.g., over 1, 3, or 5 years) may reward higher-risk funds during bull markets, misleading fiduciaries and participants.

🧠 Bottom Line

You cannot responsibly compare TDFs on return alone when their asset allocations diverge. Fiduciaries must benchmark based on:

Risk-adjusted performance
Glide path risk levels
Appropriateness for the participant demographic
Alignment with ERISA’s fiduciary standards

ChatGPT said:

benchmarking Target Date Funds (TDFs) to something like the S&P Target Date Fund Index can be misleading and easily gamed, particularly because:

Benchmarks like the S&P Target Date Index only reflect the average allocation (e.g., average equity/glidepath of funds in that vintage),
There is no requirement that the TDF match the risk profile of the benchmark, and
A higher equity allocation will often outperform the benchmark in bull markets, misleading fiduciaries into thinking the fund is “better managed” rather than just riskier.

🔎 How This Benchmarking Can Be Gamed

TDF managers can “game” the benchmark by:

Allocating more to equities (especially international or small-cap)
Taking more duration risk in bonds
Adding alternative assets like private equity or real estate (often with smoothed NAVs)
Using leverage (in CITs especially)

These tactics may result in higher performance in a rising market compared to the benchmark, even though the fund is taking on significantly more risk.

📊 Examples of Equity Overweighting vs. Benchmark

Let’s compare some common 2040 TDFs with the S&P Target Date 2040 Index, which in 2024 had approximately:

Equity: ~74%
Fixed Income: ~24%
Cash/Other: ~2%

Target Date Fund	Equity Allocation	Overweight vs S&P Index	Comments
Fidelity Freedom 2040 (Investor)	~84%	+10%	Higher US equity tilt, more aggressive glidepath
T. Rowe Price Retirement 2040	~89%	+15%	Very equity-heavy approach; often leads in returns in bull markets
American Funds 2040	~78%	+4%	Slight overweight, includes active mgmt in underlying funds
Vanguard Target Retirement 2040	~72%	-2%	Closest to S&P Index; more conservative relative to peers
BlackRock LifePath Index 2040	~74%	0%	Benchmarked tightly to average; often used as a baseline
State Street Target Retirement 2040 (CIT)	~78%	+4%	Slightly more risk in equity; often embeds alternatives in CITs

Sources: Fund prospectuses, Morningstar, 2024 allocation snapshots

⚠️ Fiduciary Implications under ERISA

Plan fiduciaries may be misled into thinking a fund is “better performing” when it simply takes more risk.
Impartial Conduct Standards under ERISA require fiduciaries to consider both performance and risk—a higher return via higher risk is not inherently better.
Courts may ask: Did the fiduciary understand that this TDF’s outperformance came from taking more risk than the benchmark?
This is especially risky when plan sponsors do not document why they selected or retained a more aggressive fund.

🧠

2. How Much Does It Matter?

The 1986 Brinson, Hood & Beebower (BHB) study found that asset allocation explained 93.6% of the variation in quarterly returns of pension fund portfolios.
Later updates and critiques (e.g., by Ibbotson & Kaplan in 2000) clarified that while asset allocation doesn’t explain everything, it still dominates over market timing or security selection in terms of predicting return variability.
- Strategic asset allocation (long-term mix) accounts for about 90% of return variability.
- Tactical allocation, timing, and security selection account for much less.

3. Impact on Performance vs. Variability

Asset allocation drives risk-adjusted returns, not just variability.
Picking the right mix of stocks, bonds, and alternatives greatly affects total returns, especially over longer horizons.
During market crises or recoveries, asset classes behave very differently—diversification reduces drawdowns.

Key Takeaway

TDFs should not be benchmarked only on return versus the S&P TDF Index—risk-adjusted performance and glidepath assumptions matter. A 2040 fund with 90% equity will likely beat the benchmark in good years, but may collapse harder in downturns—especially harming near-retirement investors if the glidepath is too steep.

There are no valid benchmarks for Target Date Funds. Comparing funds with different asset allocations does not work either. Target date funds are specifically designed to avoid accountability and thus need the most scrutiny. You have to look under the hood at the individual investment allocations and benchmark those. Attorneys are defying investment principles and basic math in insisting on using TDF benchmarks in litigation.

SCOTUS’ 9-0 ERISA decision in Cunningham v. Cornell University case– confirms my view on Annuities as Prohibited Transactions

April 21, 2025May 10, 2025 / jwatkins / Leave a comment

SCOTUS 9-0 ERISA decision – confirms my view on Annuities as Prohibited Transactions

By Chris Tobe, CFA, CAIA

The Supreme Court ruled unanimously in favor of 401(k) Transparency, while also placing the burden of proof on plan sponsors alleging that they are protected under an exception to the Prohibited Transaction rules. This rule facilitates forcing disclosures on conflicts of interest and hidden fees.[i] Investments that the managers have the potential for a conflict of interest are labeled “Parties of Interest” in the DOL/IRS 5500 forms attached financials for ERISA plans. These parties in interest have the burden of proof that they have an exemption from the Prohibited Transactions rules.

Fixed Annuities, known as IPG’s, are prevalent in large ERISA DC plans. The largest IPG is TIAA Retirement Choice Annuity which is central in the Cornell plan and, along with Fidelity, the focus of the SCOTUS decision.

I believe that all annuities are prohibited transactions due to the inherent conflict of interest issues, and in most cases, the annuity issuer and annuity salesperson are labeled in plans as parties in interest. Prohibited transaction exemptions are subject to meeting certain requirements. But the DOL does not even attempt to enforce them. Many plans just blindly accept the claims of annuity salesmen that these contracts have a “get out of jail free card” in the form of a PTE.

Prohibited Transactions Exemption PTE 84-24

Annuities for decades have claimed Prohibited transaction exemptions behind PTE 84-24. However, plans are responsible for verifying that the prohibited transaction exemptions apply to the insurance products they put in their plans. This SCOTUS decision and future similar cases may force accountability for the first time.

ERISA PTE 84-24, which is based on the Restatement of Trust, states the annuities must meet the following requirements called the Impartial Conduct Standards and Written Disclosures and Policies and Procedures backing up these standards. Most annuities I have seen do not even come close.

The Impartial Conduct Standards have 4 major obligations. A. Care Obligation B. Loyalty Obligation C. Reasonable compensation limitation D. No materially misleading statements (including by omission)

Care Obligation This obligation reflects the care, skill, prudence, and diligence – similar to Prudent Person Fiduciary standard. Diversification is one of the most basic fiduciary duties. Fixed annuities flunk this with single entity credit and liquidity risk. Diligence is nearly impossible with misleading, nontransparent contracts, and the lack of plan/participant ownership of securities.[ii] The Federal Reserve in 1992 exposed the weak state regulatory and reserve claims.[iii]

Loyalty Obligation Annuity contracts are designed to avoid all fiduciary obligation with no loyalty to participants. Secret kickbacks and commissions place the financial interests of the Insurers and their affiliates over those of retirement investors. In most cases, the annuity investor has little chance of even breaking even on the investment. The exemption requires the advisor to show their loyalty with a “Fiduciary Acknowledgement Disclosure.” Annuity contracts avoid any fiduciary language or responsibility.

Reasonable compensation limitation Annuities have a total lack of disclosure of profits, fees and compensation – effectively denying any chance for a prospective purchaser to make an “informed decision.” They also have secret kickback commissions.[iv] A number of lawsuits have settled with claims of excessive secret fees and spreads. An insurance executive bragged at a conference of fees over 200 basis points (2%) in 2013. [v]

No materially misleading statements (including by omission) Annuities have numerous material misleading statements, including the total lack of disclosure of spread/fees. They claim principal protection, but some fixed annuity contracts recently have “broken the buck” and violated their contracts. The written disclosures under weak state regulations omit critical information on risks and fees also prevents any opportunity for an “informed decision.”

GOING FORWARD

While Annuities are by far the largest area involved, I believe SCOTUS’ Cunningham decision will result in some significant consequwemces:

ERISA class action 401k litigation will explode especially against conflicted products like annuities[vi]
Plans are now talking about taking legal action against vendors, who tricked them into these non-transparent products[vii]
Plans will be more reluctant to take on non-transparent products like annuities[viii]
Plans will be more reluctant to take on non-transparent products like crypto and private equity[ix]
Plans will be more reluctant to do non-transparent administrative practices like revenue sharing[x]

Plan Sponsors with fixed annuity contracts should demand
: 1. A MFN clause to make sure they have the best rate. A MNF (Most Favored Nation) clause is a clause that states that money managers are getting the lowest fee for their pension clients.
2. A downgrade lause that allows liquidity at full book value if the insurance company issuing the annuity is downgraded.

Annuities are clearly prohibited transactions that do not qualify for an exemption but have used their lobbying power in Washington and in states, to exempt themselves from all accountability. This recent SCOTUS decision may help get accountability and transparency in plans through litigation.

[i] https://www.fingerlakes1.com/2025/04/18/supreme-court-cornell-erisa-401k-fees-decision-2025

[ii] https://commonsense401kproject.com/2024/03/26/just-how-safe-are-safe-annuity-retirement-products-new-paper-shows-annuity-risks-are-too-high-for-any-fiduciary/

[iii] Federal Reserve Bank of Minneapolis Summer 1992 Todd, Wallace SPDA’s and GIC’s http://www.minneapolisfed.org/research/QR/QR1631.pdf

[iv] https://consumerfed.org/annuity-industry-kickbacks-cost-retirement-savers-billions/

[v] https://www.bloomberg.com/news/articles/2013-03-06/prudential-says-annuity-fees-would-make-bankers-dance?embedded-checkout=true

[vi] https://commonsense401kproject.com/2024/11/19/burden-of-proof-is-on-plan-sponsors-hoping-to-qualifyfor-annuity-prohibited-transactions-exemption/

[vii] https://commonsense401kproject.com/2024/07/31/chris-tobe-dol-testimony/

[viii] https://fiduciarywise.com/cunninghamvcornelluniversity/

[ix] https://www.linkedin.com/pulse/retirement-plan-sponsors-investment-advisors-should-take-ron-rhoades-zfp8c/?trackingId=cl6WVzR8TvCNYE2H6M59WQ%3D%3D

[x] https://commonsense401kproject.com/2022/04/02/revenue-sharing-in-401k-plans/

Annuities Exposed as Prohibited Transaction in 401(k) Plans

October 10, 2024 / jwatkins / Leave a comment

By Christopher B. Tobe, CFA, CAIA

Annuities should not be allowed in 401(k)s. ERISA created the concept of Prohibited Transactions to prohibit any investments with clear Conflicts of Interest. I testified to the ERISA Advisory Council – US Department of Labor in July of 2024 on the danger of allowing annuities to be hidden inside of Target Date Funds. [i] I have co-written a paper with Economics Professor Tom Lambert on the excessive risks of annuities.[ii]

Perhaps with the exception of Crypto and Private Equity no investment better describes what should be a prohibited transaction more than annuity contracts.

Annuities are a Fiduciary Breach for 4 basic reasons.[iii]

Single Entity Credit Risk
Single Entity Liquidity Risk
Hidden fees spread and expenses
Structure -weak cherry-picked state regulated contracts, not securities and useless reserves

So why do we still see annuities in 401k plans? The reason is intense lobbying by the insurance industry, that has blocked any transparency or oversight.

Annuity providers claim to be barely legal by relying on an Prohibited Transaction Exemption (PTE 84-4) a “get out of jail free card” obtained by $millions of lobbying by the insurance industry.

Biden Fiduciary Rule

The new Biden Fiduciary rule would provide transparency that would further expose these annuity products’ conflicts of interests. The insurance industry has forue shopped in Texas in the Fifth Circuit for judges who agree with blocking transparency to block it for now.

At the Certified Financial Planner Board of Standards Connections Conference in Washington October 2024, DOL officials called out annuities as prohibited transactions. [iv] Ali Khawar, principal deputy assistant secretary for the Employee Benefits Security Administration, laid out the reasons why the Biden Labor Department continues to fight for a fiduciary rule ““To me it continues to be kind of nonsensical that you’re expecting any of your clients to walk into someone’s office and have in their head: ‘I’m dealing with this person who’s going to sell insurance to me, this person is relying on [Prohibited Transaction Exemption] PTE 84-24, not [PTE] 2020-02. Those things shouldn’t mean anything to the average American. And we shouldn’t expect them to.”

broker-dealer space transformed what it means to be in the advice market,” Khawar said. “When we looked at the insurance market, though, we didn’t quite see the same thing.”

Under the National Association of Insurance Commissioners’ model rule, for example, “compensation is not considered a conflict of interest,” Khawar said. “So there are pretty stark differences between what you see in the CFP standard, the Reg BI standard, and what has now been adopted by almost every state, one notable exception of New York, which has adopted a standard that is significantly tougher than the NAIC model rule.” [v] That process is “the CFP standard, the DOL standard, it’s the SEC standard for investment advisors and it’s Reg BI,” Reish continued. What it’s not? “The NAIC model rule,” Reish said.

“The NAIC model rule does not require the comparative analysis[vi]

Khawar added: “It’s not going to matter whether you’re providing advice about an annuity, a variable annuity, fixed income annuity, indexed annuity, security or not.” The goal with the 2024 rule, Khawar added, is to “have a common standard across the retirement landscape so that all retirement investors would be able to make sure that when someone is marketing up front best-interest advice, that that’s the standard they’d be held to by the regulator and the customer.”

Under the Employee Retirement Income Security Act, “being a fiduciary is critical to the central question of whether or not the law or consumer protections have fully kicked in or not,” Khawar added.

The Government Accounting Office wrote a piece in August in support of the Biden Fiduciary rule. They saw the problem as so severe that they suggested that IRS step in to help the DOL Better Oversee Conflicts of Interest Between Fiduciaries and Investors especially in the Insurance Annuity Area. [vii] Senator Elizabeth Warren in defense of the Biden Fiduciary rule prepared a report on the numerous conflicts of interest in annuity commissions and kickbacks. [viii]

Annuities days of hiding behind PTE 84-4 are over

Prohibited transaction exemptions are subject to meeting certain requirements. They include

The Impartial Conduct Standards.
Written Disclosures.
Policies and Procedures
Annual Retrospective Review and Report

The Impartial Conduct Standards have 4 major obligations.

A. Care Obligation

B. Loyalty Obligation

C. Reasonable compensation limitation

D. No materially misleading statements (including by omission)

Care Obligation

This obligation reflects the care, skill, prudence, and diligence – similar to Prudent Person Fiduciary standard. Diversification is one of the most basic fiduciary duties. Fixed annuities flunk this with single entity credit and liquidity risk. Diligence is nearly impossible with misleading nontransparent contracts, and the lack of plan/participant ownership of securities. The Federal Reserve in 1992 exposed the weak state regulatory and reserve claims.[ix]

Loyalty Obligation

Annuity contracts are designed to avoid all fiduciary obligation with no loyalty to participants. Secret kickback and commissions place the financial interests of the Insurers and their affiliates over those of retirement investors.[x]

The exemption requires the advisor to show their loyalty with a “Fiduciary Acknowledgement Disclosure.” Annuity contracts avoid any fiduciary language or responsibility.

Reasonable compensation limitation

Annuities have a total lack of disclosure of profits, fees and compensation. They have secret kickback commissions.

A number of lawsuits have settled with claims of excessive secret fees and spreads. An Insurance executive bragged at a conference of fees over 200 basis points (2%) in 2013. [xi]

No materially misleading statements (including by omission)

Annuities have numerous material misleading statements, including the total lack of disclosure of spread/fees. They claim principal protection, but some fixed annuity contracts recently have broken the buck and violated their contracts. The written disclosures under weak state regulations omit critical information on risks and fees.

Most plans with annuities do not have Investment policy statements, since most fixed annuities would flunk them on diversity and transparency and not be allowed. Annuities cannot provide the transparency to follow CFA Institute Global Performance Standards (GIPS) so they do not comply.[xii] Most 401(k) committees with insurance products do not review such annuity products, since they clueless on what they are. Consultants for plans with annuities do not review the annuities most of the time since they are conflicted and they themselves receive kickbacks from annuity providers.

Annuities as a Prohibited Transaction

Annuities hide most of their compensation. They are typically secret no bid contracts with no transparency and numerous conflicts of interest. They are subject to weak state regulations (sometimes categorized as NAIC guidelines). Many times they are a party of interest and shift profits from annuities to make other fees appear smaller.

Annuities are clearly prohibited transactions, but have used their lobbying power in Washington and in states to exempt themselves from all accountability.

[i] https://commonsense401kproject.com/2024/07/31/chris-tobe-dol-testimony/

[ii] https://commonsense401kproject.com/2024/03/26/just-how-safe-are-safe-annuity-retirement-products-new-paper-shows-annuity-risks-are-too-high-for-any-fiduciary/

[iii] https://commonsense401kproject.com/2022/05/11/annuities-are-a-fiduciary-breach/

[iv] https://www.thinkadvisor.com/2024/10/07/top-dol-official-sees-a-nonsensical-reality-at-heart-of-fiduciary-fight/

[v] https://www.thinkadvisor.com/2024/10/07/top-dol-official-sees-a-nonsensical-reality-at-heart-of-fiduciary-fight/

[vi] https://www.thinkadvisor.com/2024/10/07/top-dol-official-sees-a-nonsensical-reality-at-heart-of-fiduciary-fight/

[vii] GAOJuly24 Retirement Investments: Agencies Can Better Oversee Conflicts of Interest Between Fiduciaries and Investors

Click to access FiduciaryConflictsofInterest_OMB.pdf

https://www.thinkadvisor.com/2024/08/28/conflicted-ira-advice-widespread-as-fiduciaries-lack-oversight-watchdog-finds/

https://www.gao.gov/products/gao-24-104632

[viii] Warren Study – Annuity kickbacks

Secret kickback commissions https://consumerfed.org/annuity-industry-kickbacks-cost-retirement-savers-billions/